5 Burning Questions on BP

(BP article updated to reflect Monday White House report of new well leaks)

NEW YORK ( TheStreet) -- BP ( BP) gave the world -- and the markets -- the news everyone had been waiting to hear last Thursday: The live-spill cam located deep beneath the surface of the Gulf of Mexico showed no oil leaking from BP's Macondo well.

Euphoria immediately set in that the three-month old environmental disaster was finally ending, yet by Monday, all was not so well with the BP well. On Monday afternoon, White House spokesman Robert Gibbs said that the BP Macondo oil well was leaking at the top, and seepage was spotted two miles away on the seafloor. Government officials are also monitoring bubbles that can be seen using deepsea cameras.

BP tried to downplay the situation, arguing that seepage at the sea floor could come from a number of causes unrelated to the BP well itself.

The latest issues since the initial cap success signal that the cap could be coming off sooner, rather than later. However, if BP's improved siphoning system works, by BP's estimates it should be able to handle up to 80,000 barrels of oil daily.

Yet it became clear on Monday afternoon, at a press briefing by U.S. Coast Guard Admiral Thad Allen, that the siphoning system is not ready to go in the event of a cap breakdown, and it could be several days of oil spewing into the Gulf unimpeded. The Coast Guard admiral said that the government and BP decided to go ahead with the new cap even though the new siphon system would not be immediately ready to serve as a replacement because stopping any oil flow into the Gulf was a priority.


So now what? That was a question that people were asking last Friday, when BP shares gave up gains made on Thursday afternoon on reports of the cap success. If investors couldn't call an end to the BP oil spill after 12 weeks last Friday when the cap seemed as good as gold, what do investors do with the latest news of a new leak on Monday? Are BP shares still a bargain at under $40 and the environmental crisis finally more or less under control? Or do the new reports of a leak mean that BP is right back where it started, meaning, a toxic stock to hold?

The following are a series of key questions for investors to consider before adding the BP ticker to their buy list, and especially in light of the latest new on a new leak in the Macondo well. These questions were the same key questions last Thursda and Friday, and Monday as well. In fact, these questions reach to the critical issues in the BP oil spill which supercede the importance of the cap's day to day success, or failure.

First, let's run through some general questions about how the fluctuating good and bad news for BP's cap may or may not alter events related to the oil spill, from the level of control BP now has over the runaway well to the lack of control BP CEO Tony Hayward has over his future at the helm of British Petroleum.

Question No. 1: What really changed on Thursday afternoon when Kent Wells, BP senior VP of exploration and production, announced that oil had stopped flowing into the Gulf of Mexico, and then again on Monday, when a new leak was reported in the BP well?

We learned two things, neither of those being that the oil spill crisis is over, or that oil will never again flow out of the BP Macondo well. What we did learn was that after 12 weeks of limited success in taking control of the runaway well, BP had its biggest success. It didn't change the history of high-profile BP failures that preceded Thursday's progress, though, and that history, in the least, had to make one cautious about rushing to call the cap an incontrovertible success. BP and government officials say that various BP oil spill containment techniques, most notably the top kill, were "progressing according to plan" and that there was reason to be "cautiously optimistic."

The caution proved to be well-founded when the White House reported the new leaks on Monday.

There's also the most important technical point hidden beneath the Thursday afternoon and Monday headlines. The BP plan has not changed as a result of the cap success. Both BP and the government said on Thursday that the plan has never been to keep the cap on the well. It's a last resort to be used in the event of a hurricane, if the drill ships that are located on the surface of the Gulf have to abandon efforts to siphon oil from the well.

BP has said for weeks that its plan is to use a series of drill ships and riser pipes attached to the well to siphon off as much as 80,000 barrels of oil daily, to be captured or flared on the ships. That hasn't changed. Additionally, the only permanent fix for the runaway well is the drilling of relief wells that, if anything, have been pushed back by a few days from completion due to the cap and the well integrity tests.

It seemed in the last few days, with the success of the cap, that BP was leaning toward keeping the cap in place as opposed to using the improved siphoning system, but the government was resisting that appoach over the weekend, and with the report of a new leak, the fate of that BP optimistic plans seems uncertain.

If BP can handle as much as 80,000 barrels daily, it could mean it is capturing all of the oil leaking from the well, making the use of the cap pointless unless a hurricane hits the Gulf. However, don't forget that there is no incontrovertible number for the amount of oil flowing out of the BP well. Rep. Ed Markey (D., Mass.) immediately called for new tests to measure the flow rate of oil after BP announced the cap success.

Maybe we will find out the actual amount of oil flowing out of the well is more, or less, than we previously assumed. As of now though, the fact of the matter is that we still don't know for certain a single fact of critical importance: the oil flow estimate.

So what BP accomplished on Thursday was what we have known all along to be the plan: make headway on a plan to avoid a worst-case scenario if a hurricane hits the Gulf of Mexico and the containment operation needs to be abandoned. The cap had already been successfully placed above the well earlier this week, and at that point, we already knew that BP would ultimately be moving ahead with plans to capture as much as 80,000 barrels of oil daily.

Question No. 2: Did the BP cap just save Tony Hayward's job or push Hayward out the door sooner than expected?

Anyone who thinks they can answer this question who isn't in the BP board room must have either already been given Hayward's job, turned it down, or just have been informed by BP that the company suddenly had a change of heart. It seems foolish to conclude that one success after a long series of failures and public gaffes, combined with the biggest hit the BP balance sheet has ever taken -- and will be taking for years to come -- could turn the tide for Tony Hayward.

At a more basic leadership level, Tony Hayward was elevated by BP to the top spot for two reasons: to cut costs and improve safety. He clearly did the former well and disastrously failed at the latter. There is good reason to believe that at the right time, Hayward will be "leaving BP to spend more time with his family, and yacht." Given the details that keep emerging about the BP approach to well design and construction that contradict Hayward's now-infamous laser beam focus on safety, the betting man might make a buck on wagering that the buck will still stop with Hayward at a convenient moment.

Could the cap, on the other hand, expedite the process of Hayward's firing? Most BP oil spill commentators have maintained all along that it made no sense to make a change of CEO during the oil spill crisis, and to say that the crisis has ended is going too far at this point, given the BP oil spill history of optimism followed by failure and disbelief. But once the relief wells are drilled, Hayward detractors might get their long-awaited wish.

In the words of Argus Research analyst Phil Weiss, "Hayward has to be forced out, and I think it's a reasonable view that with the well capped or the relief well successful, the process could be expedited. Why bring someone into this mess before that?"

Question No. 3: What costs are going away for BP as a result of the cap, and what costs remain?

BP has already spent more than $4 billion in the 12 weeks of attempts to contain the oil spill. A successful cap, and the ability to siphon off all of the leaking oil until the relief wells are successful, means that the containment costs that BP has been paying could go down.

That's a lot of money, but a drop in the bucket compared to the estimates for potential criminal, economic and environmental liabilities that BP may face in the next several years. Those are the big-ticket items that drove down BP stock, and nothing has changed in reference to liabilities currently estimates at anywhere from $20 billion to $100 billion. BP is also engaged in a battle with Anadarko Petroleum and Mitsui Offshore over claims that BP should pay all oil spill liabilities, which is yet another wrinkle in the liability calculation game that has not been materially impacted by Thursday's cap success.

It seemed like BP won a technical battle on Thursday, but the larger battle of fighting oil spill liabilities and political repercussions is just getting started, and by Monday, even the technical victory looked shaky.

Take, for example, the fact that this week the House introduced legislation to ban or limit BP's ability to bid on oil leases in the U.S. House measures are often watered down, if not eliminated, by the full House and Senate. However, the latest political attack on BP serves as a reminder that the larger U.S. business context for BP is still fraught with uncertainty. Additionally, no one knows what such legislation would mean for existing leases on which BP is an operator. Would they have to sell majority interests on all leases where they serve as operator?

There has been talk throughout the oil spill crisis that the Environmental Protection Agency could begin debarment proceedings against BP, barring it from operating in the U.S., and if criminal charges are brought against BP, that will be a negative headline moving in lockstep with political action. Therefore, just because BP had one day of success after 12 weeks of failure doesn't exactly mean it's gone from being a public enemy to being a savior.

Question No. 4: Even with the ongoing political and liability issues, is it time to buy BP shares?

It might be time to sell BP shares, in fact. Remember, when BP shares hit an oil spill low on June 25 of $27, some energy traders smelled the fear and used it as an opportunity to buy. Given the unquantifiable liability that will still serve as an overhang on BP for some time to come, profit-taking might be in order for those investors brave enough to buy BP at $27.

There is room left for a rally in BP shares -- after all, it's still down 40% from its pre-oil spill levels. However, there could be some downward pressure on BP shares from investors who had the BP risk gene and are now looking to book some well-deserved gains. The downside pressure on shares has been in full evidence on Friday and Monday.

For those who didn't get into BP at $27, and who aren't sure if they inherited the oil spill risk-taking gene, the best answer to this question would be to review the answers above regarding the ongoing political situation and unquantifiable liabilities still faced by BP.


Question No. 5: Is it time to buy beaten-down oil service stocks?

Oil stocks rallied broadly on the news of the BP success capping the well, from the integrated oil majors to the offshore drillers to the oil service firms.

In the words of BMO Capital Markets analyst Alan Laws, the net impact of the BP cap success can be summed up in one word as it relates to the larger sector of oil services stocks: "Irrelevant."

The oil service stocks showed a big spike late on Thursday, and may get another bounce, but ultimately the most meaningful part of the battle for the oil sector could be what follows from this point forward.

The big cloud of uncertainty hasn't left, it's just Moratorium 2.0 now replacing the original version. It's great that oil is not flowing into the Gulf, but plugging the well doesn't bring us closer to lifting of the moratorium on drilling.

"There were fighting words I heard in Moratorium 2.0," BMO Capital Markets Laws said. Have the major integrated oil companies proved to Washington, D.C., that they have oil spill response plans in place that are reliable? Have they made the equipment technology improvements to provide fail-safes that can drown out the attacks on the blowout preventer?

"The stocks will get a bounce because people will say we've finally plugged the well and take a deep breath, but I ask what's changed, and I have to say nothing. The law of unintended consequences still applies for the oil sector," BMO Capital Markets' Laws concluded.

-- Written by Eric Rosenbaum from New York.

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